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Debt Restructuring talks in Sri Lanka await IMF clarity on economic performance assessment: Sources

May 02, Colombo (LNW): Negotiations regarding Sri Lanka’s debt restructuring with sovereign bondholders are currently awaiting clarity on the assessment of securities linked to economic performance within the International Monetary Fund’s (IMF) debt sustainability analysis framework, Economy Next reported citing sources familiar with the discussions.

Following the initial round of direct talks between Sri Lanka’s government and bondholders, it was revealed that the IMF had determined a March proposal presented by private investors, involving macro-linked bonds, to be inconsistent with its debt sustainability framework.

Subsequently, a new proposal submitted in April is pending assessment by the IMF to ascertain its alignment with the DSA framework.

The proposed macro-linked bond entails an initial higher haircut, with potential reductions contingent on the economy outperforming IMF projections.

Given the absence of precedent for applying a revised DSA methodology for Middle-Income Countries to such macro-linked bonds, efforts are underway to gain a comprehensive understanding of how the framework operates, according to report.

Sources cited by Economy Next indicate that representatives of the involved parties reconvened in April following the initial talks, suggesting a positive development in the negotiation process.

Typically, the IMF refrains from direct engagement with bondholders and interacts solely with governments, potentially placing bondholders at a disadvantage.

However, greater clarity regarding the application of the DSA framework to macro-linked bond proposals could facilitate expedited negotiations and enable the exchange of revised proposals.

In addition to the macro-linked bond proposal, bondholders have also suggested a governance-linked bond, a concept endorsed by Sri Lanka’s opposition.

While this represents a novel proposal, similar instruments, such as Environmental, Social, and Governance (ESG) bonds, have been issued based on alternative performance indicators.

Discussions in London involved advisors and key bondholders under non-disclosure agreements, preventing trading or altering positions during the negotiation process.

Enhanced understanding of how the debt sustainability analysis applies to macro-linked bonds would serve to streamline negotiations and contribute to expediting the resolution of the restructuring process, the report further claimed.

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